Last month I explained why many of the smartest investors I know recommend owning physical gold and silver.

In short, it’s not because they’re great investments. (Precious metals often underperform traditional investment assets for significant periods.) And it’s not even because they’re great inflation hedges. (While this is true over the long run, gold and silver can sometimes underperform in inflationary environments like we’ve seen this year.)

Instead, they own gold and silver because they’re historically the only assets that do well when things go terribly wrong: when governments fail, currencies collapse, and economies break down.

That is because they are among the relatively few assets that both: 

• Hold many of the characteristics of “sound” money (I explained these characteristics in my introduction to Bitcoin and cryptocurrencies last year)
• Carry no “counterparty risk” – meaning they are no one else’s liability

These two traits make gold and silver an ideal form of financial “disaster insurance” that I believe every investor should consider owning today. (Though it’s relatively new and fully digital, Bitcoin also has these two traits and could potentially serve this role in the future.)

I covered the basics of buying physical gold and silver in my essay last month. (If you missed it, you can catch up here.)

However, several Money Talks readers wrote in with a question I didn’t specifically address last month. Namely, how would you actually use or “cash in” this insurance in the case of financial disaster?

To answer this question, we first need to review the traditional uses of money. As I explained in that same introduction to Bitcoin I mentioned earlier, money has generally served one or more of three distinct roles throughout history: 

• Store of value: a way to hold and protect wealth over time and space
• Medium of exchange: a tool to enable easier trade of goods and services
• Unit of account: a universal “measuring stick” of the value of other goods

Thanks to our relatively stable and free economy and the U.S. dollar’s global reserve currency status, most Americans don’t fully appreciate the differences between these roles.

We generally transact in dollars (medium of exchange), price things in dollars (unit of account), and save our wealth in dollars (store of value) as well.

But in less developed economies, that isn’t always the case.

In many places, people transact in their local currencies (by necessity or convenience) but seek to save in historically more stable currencies like U.S. dollars, euros, or gold.

When you live in a country where the government may massively devalue its currency overnight, the ability to save in a stable currency can mean the difference between losing everything and having the means to move to a safer location or resume your life when stability returns.

Because of our unique perspective, many Americans assume that money must play all three of these roles at all times. And that naturally leads to some common concerns.

For example, folks often ask how they would use gold and silver to buy groceries and other necessities if the dollar failed. They point out that silver could be used for small transactions, but gold would be difficult and inconvenient to use in most cases.

That is probably true, but I think it misses the point.

Even if the U.S. dollar were massively devalued, it would almost certainly retain its role as a medium of exchange and unit of account (at least here in the U.S.).

If so, you would likely see gold and silver (and probably crypto) exchanges spring up all over to trade these assets for dollars.

This has historically been the case in other countries suffering from severe inflation and currency debasement. So, using your gold and silver is unlikely to be an issue in this situation.

If, instead, we were to experience a crisis so severe that the U.S. dollar and other major currencies were no longer accepted as a medium of exchange (which is extremely unlikely), it would be a different story.

But it’s important to understand that this scenario implies that the economy is no longer functioning.

In that case, even gold and silver are unlikely to be of much use, as businesses and supply chains won’t be operating. Barter of food, water, and other necessities is likely to be the primary form of trade until the acute phase of the crisis ends.

However, history tells us that your precious metals will still have value when that crisis does end. In fact, given the inherent problems in the current “fiat” monetary system, they could resume a more prominent role in any new system.

In other words, the real value of owning gold and silver today is not in their potential to act as a medium of exchange during a crisis. The real value is in their proven track record to act as a store of value to get you to the other side.